David Stasse - VP, Treasury and IR Chris Pappas - President and CEO Barry Niziolek - Executive Vice President and CFO.

David Begleiter - Deutsche Bank Aziza Gazieva - Wells Fargo Dylan Campbell - Goldman Sachs Nicholas Cecero - Jefferies Hassan Ahmed - Alembic Global Vincent Andrews - Morgan Stanley Michael Leithead - Barclays Matthew Blair - Tudor, Pickering, Holt Eric Petrie - Citi.

Good morning, ladies and gentlemen, and welcome to the Trinseo First Quarter 2018 Financial Results Conference Call. We welcome the Trinseo management team, Chris Pappas, President and CEO; Barry Niziolek, Executive Vice President and CFO; David Stasse, Vice President, Treasury and Corporate Finance.

Today's conference call will include brief remarks by the management team followed by a question-and-answer session. The company distributed more details remarks on this financial results along with a press release and presentation slide at close of market yesterday.

These documents are posted on the company's Investor Relations website, and by means of a Form 8-K filings with the Securities and Exchange Commission. [Operator Instructions] I will now hand the call over to David Stasse. Please go ahead, sir..

Thank you, Kim, and good morning, everyone. [Operator Instructions] After our brief remarks, instructions will follow to participate in the question-and-answer session. Our disclosure rules and cautionary note on forward looking statements are noted on Slide 2.

During this presentation we may make certain forward looking statements, including issuing guidance in describing our future expectations. We must caution you that actual results could differ materially from what is discussed, prescribed or implied in these statements.

Factors that could cause actual results to differ include but are not limited, factors set forth in our annual report on our Form 10-K under the item 1A, risk factors. Today's presentation includes certain non-GAAP measurements. Reconciliation of these measurement is provided in our earnings release, and in the appendix of our investor presentation.

A replay of the conference call and transcript will be archived on the company's Investor Relations website shortly following the conference call. The replay will be available until May 3, 2019. Now I would like to turn the call over to Chris Pappas..

There will be some new styrene capacities brought to the market, but the rate of real capacity growth and its impact on operating rates in margins, in combination with expected rising demand, will likely yield a much more muted change than the view proposed by some of the consultants. Now I'd like to discuss second quarter and 2018 guidance.

For the second quarter, we expect net income of between $93 million and $101 million, and adjusted EBITDA of between $160 million and $170 million.

This assumes minimal net timing impacts, and includes some favorable impact from known planned and unplanned styrene outages so far in the second quarter, which impact our feed stock and AmSty segments, as well as solid performance across all of our other segments. Now please turn to Slide 12.

Moving to full-year 2018, we expect net income of between $392 million and $408 million, adjusted EBITDA of between $665 million and $685 million, diluted EPS of $8.82 to $9.19, and adjusted EPS of $8.87 to $9.24.

This outlook assumes the unfavorable net timing of $7 million in the first quarter, minimal net timing beyond Q1, and no impact from unplanned styrene outages beyond what we currently have visibility into for the second quarter. Now please turn to Slide 14.

For cash generation, we are currently forecasting $150 million for capital expenditures, which includes the $10 million for the business services transition, $90 million for cash taxes, and $50 million for cash interest for the year.

Also as I mentioned earlier, we expect about $25 million of cash expenses related to the business services transition that we anticipate will be added back for adjusted EBITDA purposes. Finally, we expect a structural build in working capital of about $30 million from the growth project in synthetic rubber and performance plastics.

Assuming no other changes to working capital, this will yield cash from operations of about $480 million and free cash flow of about $330 million. In closing, we are off to an excellent start this year with record profitability in the first quarter.

We're expecting a strong second quarter as well, and continued solid business fundamentals across our portfolio through 2018, which we expect to be another very good year for profitability and cash generation. And now, Kim, you may open the phone line for questions..

Thank you. [Operator Instructions] Your first question comes from the line of David Begleiter with Deutsche Bank. Your line is open..

Chris, on the styrene supply demand, first, very helpful.

If we do get to those low 84%, 85% operating rates in 2021, 2022, how do you think the EBITDA compares then to the EBITDA you might realize over the next, in the '18, '19 timeframe?.

Well, the point that we made on the call, David, I think is clear. Those operating rates are very similar to the ones we experienced in 2015 through 2017. And of course, you have those EBITDA numbers for those years now.

It's hard to draw precise correlations, but the EBITDA for those years, in total, for styrene, including our AmSty contribution, ranged from about $70 million in 2015 up to about $120 million or $130 million.

So again, hard to be precise about whether they'll be a correlation there, but we certainly believe those operating rates are going to give us reasonably healthy styrene margins, if they occur at that low end. Now remember, those are nameplate capacities, and those don't count on any further delays or of course, any other changes to the supply side.

So net, net, net, we feel like that forecast period is not something to be concerned about..

And just on the recent U.S. capacity announcement.

What do you think drove that announcement, and has this some potential for some capacity closure on the back of that announcement by that -- by that producer?.

Hard for us to speculate, Dave, on that, obviously. I think when you read that announcement, it's an engineering study that may or may not lead to a decision. I think that's the exact wording in the announcement. Other than that, it's hard for us to comment..

And your next question comes from the line of Frank Mitsch with Wells Fargo. Your line is open..

It's Aziza on for Frank. A question on your full-year EBITDA guidance.

The moving parts for Synthetic Rubber and Performance Plastics, could you just explain the updates to those figures?.

Synthetic rubber, we took down five, which I think is fairly nominal from the 1 10 to the 1 0 5. We did that really, on the basis that while we're having record SSBR sales, as we pointed out, and quite strong volumes in rubber across the board, we do see, so far this year, a less robust E-SBR market, that's the low end of our rubber franchise.

On that basis, we felt like taking the year down slightly in rubber would be the prudent thing to do. And we'll have to see where the rest of the year develops to a stronger E-SBR market, which could come from arbitrage or other opportunities in Asia, but that's the fundamental change in that dynamic in rubber.

Our record volumes in SSBR are pretty clear. We do expect continued ramping of that asset through the year and into '19. So a subtle change driven by the E-SBR market dynamics we have seen year to date.

In Performance Plastics, we took that up about $10 million, and that's because we believe we're going to have stronger fundamentals in that portfolio, including our new ABS facility in China, including continued strong automotive sales. And generally, a continued strong polycarbonate market.

So against that backdrop, we took that one up by the $10 million..

Okay.

And regarding the styrene dynamics that you guys laid out through 2022, could you foresee over the next few years, possibly Trinseo announcing some sort of capacity addition? Or would you rather not?.

That's the easiest question I'm going to get. No. We've been pretty clear since the beginning of our company that our capital deployment and our view of the world of Styrenics is crystal clear. We are not investors in that capacity.

We think the changes that occurred in the Styrenics world over the last seven to eight years have been healthy for the industry in general, overall market. We do not see that as a place to deploy capital nor do we see it as a place where Americas Styrenics will deploy capital. We've been crystal clear about that..

And your next question comes from the line of Bob Koort with Goldman Sachs..

This is Dylan Campbell on for Bob.

Just following up with that question, could you kind of go through the economics of actually building a styrene plant in the U.S., maybe not for you guys but for a competitor? So the disparity between cheaper ethylene and then maybe higher costs of benzene for importing that into the U.S.?.

Yes. Well, since we haven't studied it because we're not doing it nor is AmSty, we do have a sense of it, of course, Dylan. If you look at the morms that the gray bars, as we call it, that we publish, we have kind of refreshed our view of returns compared to the gray bars.

And while this is not precise in the sense of we're not doing deep engineering studies, I think it's directionally pretty accurate. So at about a $500 morm per ton, in our view, you have about a 20 -- sorry, 15% IRR project, at a $500 morm.

And the reason we use that number is number one, we think a 15% IRR will not -- a hurdle we would use for capital projects, some might. But more importantly, if you look at the morms that we've had in this business, over the last several years, from 2013 to 2018, there's been about 4 quarters where the morm was about $500 or more.

So now those are European numbers, to be fair. So it it's just a picture, I think, from our point of view, that would suggest, unless you believe and incidentally, if you look at those gray bars, there are many, many months when those morms drop lower than that, 300, 308, 345. That would be, of course, a much lower IRR, more like about 6%.

So you'd have to have the view that these morms are going to continue for a sustained period of time, et cetera, et cetera. So with all of that as a backdrop, we've said many times, we just don't think people are going to be investing in styrene monomer now. I think our view on what has been recently discussed in China is also clear.

We think they will build certain capacities, but we don't think the operating rates are going to drop that severely, and we also don't believe those capacities are going to come on as they're suggested by certain analysts in certain reports..

Got it. And then on the supply and demand outlook, I think you mentioned that, that was nameplate capacity. I'm curious on your thoughts on kind of normalized outage level because we've seen quite a bit of outages across the industry. And what, I guess, that normal average would boost that operating rate or change that operating rate going forward..

I think the planned outages have always been relatively consistent in this industry, they vary a little bit, but they're heavier in the spring. And in the spring period, there can be 8%, 9%, 10% of the capacity out on a planned basis.

In the fall, there's an additional planned outage season, but that would be a smaller quantity, lower single digits, 6%, 7% capacity, might be offline on a planned basis.

Now, remember in this name plate capacity, we also include the non-integrated China-based styrene at nameplate, and those capacities have traditionally run at 50% to 60%, and they still represent a pretty reasonable amount of the global capacity in that timeframe.

So those are, I think, the other dynamics you should that add into your thought process for actual operating rates..

And your next question comes from the line of Laurence Alexander with Jefferies. Your line is now open. .

This is Nick Cecero on for Laurence.

So I guess, just when looking back historically, what's kind of been the pattern in terms of delays or problems with starting up these new facilities within the styrene chain?.

Engineering availability; permitting; environmental pressures, particularly now in China. Those kinds of dynamics lead to delays.

There have been studies done in the past that suggests, on the order of 75% of the announcements that are made actually get built in the chemical industry, and some quantity of those, a large quantity of those are delayed by six months to a year. So on our construct, Nick, what we did was we put the dotted line up there with a six month delay.

And I think that from our point of view could be reflective of some norm, it could be longer than that; we'll have to wait and see. But clearly, our view is that it's not easy to put the capacity in according to the outline as planned..

Very helpful. And then just one more.

Maybe you can provide some additional color on demand trends across the different regions and where you might be seeing some acceleration or deceleration?.

Demand trends for us across the regions, generally, are very healthy. You can see it in our SSBR numbers, we're seeing very good automotive results out of the U.S., in particular. We're seeing strong demand in construction, I would say, across the board. I wouldn't differentiate by region, Nick.

I think just general good global economic conditions and generally, pretty good demand trends..

And your next question comes from the line of Hassan Ahmed with Alembic Global. Your line is open..

Chris, obviously, very helpful, the supply/demand analysis that you guys presented. Now I just wanted to sort of make sure I'm understanding this right. And I know you've addressed this in response to a few different questions. You guys have given out nameplate capacity and nameplate utilization rates.

And I guess, in response to one of your earlier questions, you said the effective side isn't factored in. So obviously, this doesn't factor in the impact of outages, it obviously doesn't factor in the lower utilization rates in China.

The third thing that I wanted to sort of touch you on or check with you was that obviously, be it the Styrenics chain or a few other chains, there continue to be this sort of rationalization or shattering of capacity in China.

What sort of assumptions are baked in with regards to that capacity in the supply/demand analysis?.

In our dotted line on Chart 11, we have two assumptions in there that are different than the solid line. One is the six month delay of the capacities. The other is that we have a small amount of closures, you can see it in our footnote on that chart, that we assume 500 KTF capacity closures in each of the years of 2020, 2021, 2022.

That's the construct, Hassan. That plus the 6-month delay, it creates the dotted line from the solid line. So that's the assumption that's baked in relative to closures.

Now it's hard to say whether there will be closures or not, but we know that these industries continue to look at rationalization, particularly in China, and we just made an assumption of what I just outlined.

I think the main point on this is the solid line itself creates an environment of operating rates that looks like 2015 to 2017, where we had pretty healthy situation in styrene. The other key point is 2019 is the highest operating rate we've seen in a long time.

And then the third point is, in the period 2020 to 2022, the potential for the dotted line to occur is out there driven by the two potential dynamics of delay and closures. I think that's the net, really, substance on that entire chart..

Now as a follow-up, obviously, lots of puts and takes around the whole sort of China tariff side of things. A couple of products that you guys produce, be it polycarbonate and the like, included in the initial list as well.

I would just love to hear your thoughts about in a draconian scenario is, if these tariffs were to go through, how that would impact your business?.

Well, I don't think our views changed on that at all from the last call where we gave -- we had the numbers then, the proposed tariffs, if you will, on styrene, and we gave our view on that call. Nothing has changed. The numbers haven't changed nor as our view changed.

So I think until they're finalized and until the final numbers come out, we would just be exactly where we were a couple months ago, we don't see a substantial change from that. Now there's delegations there now.

They're not there specifically, frankly, to talk a lot about chemicals in my view, but we'll have to see how well of the relationships work out here in this trade dynamic, the globe is involved in. I'm actually a little more positive about that macro dynamic, macro trade dynamic, then I was a little while ago.

And in polycarbonate, by the way, we don't export. So remember, we're a net purchaser of polycarbonate. We only have 1 plant. We make it in Europe and we use it 100% in Europe or sell in Europe. Otherwise, we're a buyer of polycarbonate. So we would not be directly affected by anything in polycarbonate..

And your next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open..

Just wondering if you can just walk us through the free cash flow dynamics for the year.

Obviously, a big build in working capital in the first quarter on volume ahead of your planned downtime, but how should that shaped out in the back half of the year? And is your free cash flow expectation, I can't tell from looking at the two slide decks, this quarter and last quarter, are you higher or lower, given the guidance range and the working capital build?.

I think on a -- this is Barry. From the prior quarter, from the prior call, we're about on track. A couple of things to add is like if you look at the recovery, we had the outflow in the first quarter that we mentioned in part because of, one, pricing dynamics and two, because of the builds in anticipation of maintenance shut down.

As you look at it, probably pretty close to -- we expect recover a fair amount of that in the second quarter as we come back and use the inventory as we're bringing our plants back up. And then from there, you'd see a more ratable recovery over the third and fourth quarter..

And then just as a follow up, Chris, any thoughts on sort of the overall strategy in terms of M&A, bolt-on or just sort of how you're about managing the variety of commodity and sort of more specialty products within the portfolio?.

Vince, we haven't really, I'd say, changed our view on this at all. When we started the company and went public, we really thought about three primary vectors, if you will, to enhance shareholder value.

One was the view that the capacity utilization operating rates of styrene would be constructive, and that would drive a certain amount of value into the company and we expected that to extend itself for a period of time and we obviously still have that view.

Second, we had a view that we could grow the other portions of the company, Synthetic Rubber, Latex, Performance Plastics. We still have that view; we have $100 million of EBITDA growth targeted that we're still on track for.

And three, smart use of cash, and that includes both return to shareholders, which we've been doing through both dividend, rising dividend and share buybacks, and a balanced approach to investing in the company. M&A, at the moment, for the company, I would put more on the back burner, certainly, of any type.

It's just hard to do it in this market environment, especially given our multiple, which I think is low for what it should be, but our multiple valuations, etcetera. So I think you ought to be thinking about us levering those same things. We think styrene is going to continue to be constructed.

We believe we're going to deliver our $100 million growth target and we believe we're going to be smart at managing our cash around dividend and share buybacks with a lower emphasis on M&A..

And your next question comes from the line of Duffy Fisher with Barclays..

This is Mike Leithead on for Duffy this morning. You've mentioned polycarbonate strength, I think, a couple of times in the slide.

Can you just update us on how you're seeing this market developing today? And how, if at all, that changes how you're thinking about this business through this year and into next?.

Well, polycarbonate has been on a rising trend in terms of margin. It's continued in the early part of this year. We think it's probably going to be more or less, the same through the balance of the year. There is limited polycarbonate capacity coming in the forward period, '19, '20, '21, so we think that's a constructive dynamic.

We're a very small player in polycarbonate. We have one plant. And if your question is because polycarbonate looks good, is that a place we would be interested in investing, the answer is no. Our strategy in polycarbonate is to continue to move our polycarbonate polymer as much as we can into our differentiated compounds and blends business.

As we do that, we will be less of a participant in the merchant market. And that is not an arena, polycarbonate, where we would look to deploy capital for growth..

Makes sense. And then I guess, circling back on the free cash flow, your guide for this year is about $330 million. If we extrapolate kind of what you did in 1Q, you're on pace to spend about $65 million on dividends and about $100 million on buybacks.

So I mean, how should we think about the other half of use for that free cash flow? It sounds like M&A is not looking attractive today. In your valuation, you described as cheap.

So I mean, could there be more aggressiveness on the buybacks as we get through the year?.

We targeted $100 million, we did $24 million. We'll have to see how the year progresses on buybacks. We have recently challenged our business leaders to look hard at additional growth. We think one of the highest returns for our cash are high return organic growth projects.

So we're going to give that a little bit of chance, a little bit of time to develop. If we accrete cash in the intervening time, I don't think that's a bad thing for the company.

And if we can get to a spot as we work through the year with additional organic growth, that we can put into place for late in '19 into 2020, I think that would be a good use of cash for the company. So at this stage, that would be the direction we'd be thinking about..

And your next question comes from the line of Matthew Blair with Tudor, Pickering, Holt. Your line is now open. .

Just want to turn back to the demand outlook on Slide 11. It's showing 2.3%. The past couple of years have been have been better, right, around like 2.8%, 2.9%.

So just want to get a sense, is that a -- just a conservative number that you're putting out going forward? Or did you see something the past couple of years that spiked up demand? Any thoughts there would be great..

Conservative number. When we put these together, we worked very hard with the consultants we hired, our own people. And I felt, and Barry felt, look, the industry analysts are actually using more like 2.5%. We do have a historic couple of years at 2.5% to 3.0%, we should mentioned. But for the purposes of this forecast, let's put 2.3% in.

And if it turns out to be higher than that, that's terrific, that's to the upside. So that was about as deeply as we thought about it. When we put these forecasts forward, we'd like you guys to look at them and say, "Hey, management took a reasonable approach." That's fundamentally the way we'd like you to think about it.

Not an aggressive approach in any direction or another, but a reasonable approach..

Okay. Great. And then, did -- have you also looked at the, in any sort of upcoming capacity growth in styrene derivatives? Just with the thinking that the Trinseo is fairly well integrated on its styrene, right, I think AmSty is perhaps a little net long styrene but in Europe and Asia, I think you're pretty well integrated.

So do you still -- do you see the same kind of 2.5% to 3% capacity growth in areas like polystyrene and ABS and some of those derivatives, too?.

we're not going to be building polystyrene. Our investment in Styrenic Polymers or styrene in the downstream polymers has been, of course, SSBR. In some way, in China, SB latex and recently in China ABS, and those would be to continue -- those would continue to be the things we would look at for our polymer growth agenda, Matthew, not polystyrene..

And your next question comes from the line of P.J. Juvekar with Citi. Your line is now open. .

This is Eric Petrie on for P.J.

I was wondering, within your study on styrene market, were you able to determine how much capacity in China is integrated versus non-integrated? What's the average utilization difference? And then how much of that capacity is operating at breakeven or negative cash cost?.

I think we got that question, we're straining here from your line. But I think your question is the integrated, non-integrated China, in general. So the operating rate for those facilities have been historically 50% to 60%. I think in the most recent period, we would peg them as maybe in the high end of that range -- I'm looking at Dave, yes.

In the recent period, Eric, so in the last several months. We have now defined a capacity today that is not integrated, has not changed much. It's going to change a little bit in the future if you look at Slide 11. But even if you go out to 2022, there'll still be a significant portion of the Chinese capacity, a bit non-integrated.

Today, it's on the order of about a third. So you just would have to do the math to work forward. My guess is it's going to drop to maybe a quarter, if those capacities get built in China, as outlined on 11.

So the integrated will go up, the non-integrated will come down, but the non-integrated in China will still be 25-or-so percent at the end of this building period that's described on Page 11..

Okay.

And then specifically, to the economics of the integrated and non-integrated, are they operating profitably or unprofitably?.

Well, the integrated facilities that are in China and were proposed would in our view generally, be more profitable. And the non-integrated are at the high end of the cost curve, which makes them by definition, less profitable, and it just depends on the month and the local margins and so on.

What we do know is that right now, the inventories in China for styrene are actually quite low. The numbers just came out last week and they're....

38..

Below 40, so that's the lowest they've been in a long time. They came down from, I think, 75 to 40. So that would suggest there's not a lot of production going on there, at least in the prior 90 days or so, or not a high amount of production, which would suggest profitability is not great. So that's about the only data we can give you.

Okay?.

And lastly, the $100 million core of targets. You had $48 million remaining to do in 2019.

Is that going to be out from existing growth investments or all you have to do a couple more full time deals?.

It's really 40 because we have 52, but we have a negative 8 timing. So we're really at about 60 net of timing. The answer your question is it will be delivered from existing, committed projects, notably the ABS facility, which is ramping up in China, and the SSBR facility which is ramping up in Germany.

Those two are the main drivers of delivering that final quantum in 2019. And if you recall from Investor Day, we outlined that 100 million as 75 million from committed project and 25 million from activities to be determined.

And in the intervening time between Investor Day in November 2016 and today, we've done one acquisition and a couple of small projects, and we've communicated that the 25 million that we had not defined at the time of the Investor Day, we have largely covered through the acquisition of other small projects, not completely but largely covered.

So that gives you a sense of, I think, exactly where we stand and we have the 60 number. Now remember the 60 includes polycarbonate uplift, and we have 40 more to deliver on that basis in 2019..

And there are no further questions at this time, Trinseo would like to thank everyone for joining today, and this concludes today's conference call, and you may now disconnect..